The race for the door: carriers reach tipping points on rate adequacy

What started as one major carrier putting its foot down on California homeowner insurance rate inadequacy is starting to take on the sound of a stampede. Wildfire fanned by inflation may be herding carriers to the exits, but seems to catch regulators flat-footed.

State Farm, the #1 California admitted insurer with an 8.7% market share across all P&C lines and a head-turning 21.2% of the multi-peril homeowners market, made the big splash with its end-May announcement it won't be accepting new business in the state aside from automotive.

Allstate, California’s #4 P&C insurer overall and #6 in homeowners multi-peril with a 6.1% market share, followed suit within a week’s time.

Those two moves alone put nearly half of the California homeowners market on ice, presumably well beyond the capacity of the state’s #2 in homeowners, Farmers Insurance Group, with 14.9%, or the likes of CSAA Insurance, Liberty Mutual and Mercury, each with homeowner market shares above 6%, to fill in any gaps.

And in fact, those players also don’t see any amazing opportunities to rush into.

“Our primary focus is to continue serving the needs of our customers,” the state’s #2 homeowner writer, Farmers, told Intelligent Insurer to wave off question on appetite for new business. Farmers is more focused on engaging with regulators in pursuit of rate adequacy than with the market for new volumes.

“While we continue to monitor the changing developments in the California insurance marketplace, we remain actively engaged with the California Department of Insurance and others interested in improving the availability of property insurance in the state,” Farmers said in its response.

Meanwhile, reports have stacked up of other departures, be it from California jurisdictions or similar.

The Wall Street Journal quoted insiders as saying that AIG is plotting curbs on homeowner policy sales to affluent customers across some 200 postal codes in seven US states above and beyond the restrictions it already has in place in California. In California, AIG is already down to a fractional 0.2% market share in homeowners on the admitted market.

Other reports have Nationwide starting to build up the demands it is placing on new homeowner business across a variety of states. In California, Nationwide carries a mere 2.5% of the admitted market.

The upshot for industry observers: regulatory attempts to protect voters from sharp rate hikes for homeowners insurance are instead putting homeowners into an insurance vacuum as more and more firms quietly back off from what they see as money-losing ventures.

Behind it all: inflation fanning wildfire losses. In its announcement, State Farm cited “historic increases in construction costs outpacing inflation, rapidly growing catastrophe exposure, and a challenging reinsurance market” in justifying its decision.

Wildfire threats resounded in the company’s announcement, although State Farm tipped its hat to “wildfire loss mitigation efforts” taken to date by California authorities.

The one thing California’s approach to wildfire has lacked, insurers moan, is allowance of catastrophic modelling. The industry has long complained of California regulations that indirectly exclude risk modelling by tying rates to moving averages in loss trends. With Californians racing to build homes in the ever-flammable ‘Wildland Urban Interface’ and with climate change further drying the tinder, each new year can get well ahead of any running average.

While California gave insurers a respite on the wildfire front in 2022 with only 363,939 acres burned, it followed the record years of 2020 and 2021 where 4.4 million acres and 2.6 million acres, respectively, were affected, data collected by Gallagher Re indicated. Wildfire got renamed from secondary to primary peril and the risk modelers joined forces with the climate scientists around some high-powered big-data actuarial math.

All eyes will fall on a mid-July public discussion being held by California regulators to “examine the use of catastrophe modelling tools in insurance rate approval” with an acknowledgement up front that “risk assessment tools are an important element for achieving expanded insurance options for current policyholders and those seeking insurance policies.”

Prior attempts to look into such matters have resulted more in mitigation and prevention efforts while falling short on direct questions of rate setting.

One might be tempted to look to the hurricane- and litigation-prone Florida market for further developments. But Florida stands rather as a model of what can happen: national carriers have already forsaken the market and notable one-off reductions in capacity have focused on the insolvencies of individual small-name carriers who are largely captive to the Sunshine State.

For Florida, the handful of nation-wide carriers braving the market are now down to a 10% market share in aggregate. The state insurer of last resort, Citizens, sweeping up clients by the fistful through a series of insolvencies in 2022, more than doubled its market share in 2022 by direct premium written to 22% from 9.6% in 2021, a data set prepared by Gallagher Re indicated. The local and regional carriers that take the bulk of their business from the Florida market grew their direct premium written by one third the rate of the market as a whole, but still account for more than 2/3 of the Florida market.

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